Automakers roll dice on emerging ride-share services

In this file photo, Katie Baranyuk gets out of a car driven by Dara Jenkins, a driver for the ride-sharing service Lyft, after getting a ride to downtown Seattle. General Motors now owns a 9% stake in Lyft. Toyota, Volkswagen and BMW also made recent investments in ride-sharing platforms.(Photo: Ted S. Warren, AP)

Automakers, much like sweaty-palmed teenagers, at their first dance are hustling for partners in this growing, uncertain world of ride-sharing before they're left to wrestle with their angst over what might have been.

In the last week, Toyota announced a vague, details-to-come hookup with Uber. Volkswagen infused $300 million into European ride-sharing start-up Gett. BMW's i Ventures provided $5 million of seed capital for Scoop, a ride-sharing platform operating in the San Francisco Bay area. In January, General Motors invested $500 million for a 9% stake in Lyft.

About 15 million Americans will use a ride-sharing service this year, a figure projected to grow to more than 20 million by 2020, according to eMarketer.com, a research website that studies the sharing economy.

None of these new ventures, not even the leviathan Uber, is profitable. Their story is growth, the catnip of technology investors. They live in a different world from that of auto manufacturing.

The major ride-sharing players don't disclose their financial results because they are privately owned. But in February, Uber CEO Travis Kalanick said the company is profitable in the U.S., but lost more than $1 billion last year in China where it competes with well-funded Didi Kuaidi.

"To me, the ride-sharing business as it is structured is untenable," said Aswath Damodaran, a professor at New York University's Stern School of Business who has studied the ride-sharing market for several years. "It is capable of delivering large revenues and high revenue growth, but incapable of being profitable."

So why the rush by established automakers to enter such risky territory? In Damodaran's view, the ride-sharers need the carmakers even more than the reverse.

"Today, their drivers act like free agents always do and go to the highest bidder," Damodaran said. "Consequently, these companies have to create more lasting links with drivers and one way to do that might be to get Toyota or GM to lease cars to their drivers."

Bumpy road

Recently, however, there have been bumps along this emerging mode of mobility.

Concerns rose anew over the way these services screen drivers in the wake of charges for Uber driver Jason Dalton in a murderous rampage in Kalamazoo.

Ride-sharing regulations, which so far have been lax in most of the U.S., are beginning to tighten in some jurisdictions.

Earlier this month, Uber and Lyft withdrew from Austin, Texas, after voters rejected a proposition that would allow the companies to regulate themselves and bypass the city’s mandate for fingerprint background checks on drivers.

There there are tensions between Uber and its drivers.

About three weeks ago, Uber agreed with the International Association of Machinists and Aerospace Workers, to create an association, the Independent Drivers Guild, that would allow 35,000 Uber drivers in New York City some benefits and workplace protections.

So far, these unresolved issues are not dampening automakers' enthusiasm for ride-sharing.

"These are not simply financial investments. That’s they way venture capitalists would look at it," said Bryce Pilz, a University of Michigan law professor who has studied the ride-sharing market. "The auto companies have historically operated pipelines to sell their products mostly for personal use. As ride-sharing takes off, the total number of personally-owned cars on the road decreases.

"The automakers see the value of having a piece of the ride-sharing platform to offset that trend. Plus, ride-sharing is where fully autonomous cars are more likely to come to market."

Won't that make Uber, Lyft and Gett become new and potentially large fleet customers, much like Hertz, Avis, National, Enterprise and Budget? And aren't those lower-priced, lightly-equipped models the ones that most manufacturers are trying to reduce in order to maximize profits?

There is a significant difference, Pilz said.

“With the rental companies, it's simply a sales relationship, whereas these new partnerships could go much deeper," he said. "The car companies are interested in access to the ride-sharers’ data."

That includes everything from each customer's frequency of use, to where they dine most often to what entertainment apps they prefer in the vehicle. It's too early to know, but eventually this data could generate revenue that the new partnerships conceptually share.

Lining up powerful partners

The ride-sharing businesses see a future in which they could be competing directly with Google or Apple, said NYU's Damodaran. Those giant companies likely would rely on a traditional auto manufacturer to produce their vehicles, as illustrated by Google's recent announcement with Fiat Chrysler to make a test fleet of fully autonomous Pacifica minivans.

"Connecting with car companies that have assembly lines and physical production capabilities might be a good way to compete," Damodaran said.

Much remains uncertain and there are potential pitfalls along the way.

In an October 2014 interview with McKinsey & Co. consultant Hans-Werner Kaas, Bill Ford warned of the hazards ahead.

"The reality is that we will not own, or develop, most of these technologies," Ford said. "So we have to be a thoughtful integrator of other people's technologies and understand where we add value. Because if we’re not careful, we could become like some mobile-handset makers, where all the value is added by someone else."

Skeptics can point to the $500 million GM has spent on Lyft or the reported $1 billion it paid to acquire Cruise Automation and argue the automaker overpaid for unproven technology or a questionable business model.